Forming a new LLC can be confusing and complicated, especially if you're unfamiliar with the process.
After consulting our team of legal professionals and doing comprehensive research on the topic, I’ve compiled the essential information you need to establish your LLC successfully.
This walkthrough article will help you navigate the process of creating an LLC in California effortlessly. We’ll also discuss the pros and cons of an LLC to give you a better decision-making position.
Quick Summary
- Starting an LLC in California involves several steps, including choosing a unique business name, finding a registered agent, filing articles of organization, obtaining an EIN, and obtaining necessary licenses and permits.
- Forming an LLC offers benefits such as liability protection and pass-through taxation, but it also comes with drawbacks, including high taxes and additional fees.
- It is recommended to separate personal and business assets, open a separate bank account for the LLC, and consider getting business insurance for protection.
How to Create a California LLC?
To create an LLC, you must comply with California state law requirements. The process typically includes picking a business name and filing articles of organization with the secretary of state or other specified agency.
Here are the steps you can follow to create an LLC.
1. Finding a Suitable LLC Name
Picking a business name for your LLC is the first step in establishing your business.
Your California LLC's name must be unique and distinguishable from other names on the California Secretary of State records. So, avoid using certain words or phrases that would otherwise be allowed for personal use.
You cannot use any restricted word/term as part of your business name without the consent of the California Secretary of State. This includes any term associated with any government agency (Treasury, State Department, etc.).
Check California's Code of Regulations section for a detailed list of restricted LLC terms [1].
Your LLC must include the following abbreviations or terms: LLC, LLC, Ltd., Limited, Company, or Co.
You may also utilize the Secretary of State's website to look up a California LLC and check if your desired name is already taken.https://www.sos.ca.gov
2. Find a California Registered Agent
A limited liability company requires an LLC registered agent to conduct business. The person or company you pick as your agent will receive essential legal and tax documents on behalf of the LLC, like the operating agreement.
Search the internet and check with your personal network to find a high-quality registered agent in California.
Many reputable companies will offer their services for free or at a very affordable rate. A registered agent fee usually ranges from $25 to $100 annually.
Once you find a reputable California registered agent company, they will provide you with a unique account number associated with your new business.
You’ll need this information to log into the registered agent service company's website and complete any necessary forms required by your LLC in California.
3. File Articles of Organization
Registering an LLC is usually as simple as filing Articles of Organization. The state business entities filing fee is $70, and it takes a few business days to process the Articles of Organization once submitted by mail or in person at your local Secretary of State's office.
You can file the LLC Articles of Organization through the California Secretary of State.
You’ll download and fill out an application, sign it before a notary public, include payment by check or cashier's check made payable to "Secretary of State," and mail them all together to the California Secretary of State.
You can also opt for expedited registration by mail or online, but remember that you’ll be charged an additional filing fee. You can opt for 24-hour registration, same-day registration, or 4-hour registration.
Additionally, you can ask for help from ZenBusiness, a specialized company that offers superior LLC formation services in the state of California.
4. File LLC Initial Statement of Information
The California Secretary of State requires that all LLCs submit an Initial Statement of Information (also known as Form LLC-12) within 90 days after formation. You can complete it online, in person, or by mail.
You will have to pay a $20 non-refundable filing fee.
5. Obtain a California LLC EIN
Every LLC in California is required to obtain an EIN (Employer Identification Number). You can obtain one online in under five minutes.
To register the LLC, you must provide a Federal Tax ID number and another name for your EIN.
If you do not already have one from a previous business, apply immediately because time is of the essence.
There are two ways to obtain a Federal Employer Identification Number: through the IRS or your state government (in this case, California) [2].
It’s much quicker and easier to go online and apply for it on the official website of the Internal Revenue Service. You’ll be issued one immediately upon completing a simple application form.
EINs are required if you plan to hire employees, open a bank account for your LLC or pay state and federal taxes on behalf of the LLC.
An EIN is not an official document but merely proof that you comply with all federal tax regulations and have applied to become part of their system as employers or taxpayers. It will be used when reporting earnings, losses, etc.
6. Obtain LLC Licenses and Business Permits
Califonia licensing requirements vary depending on the business type and location.
If you plan to conduct business in Los Angeles County, be aware that some counties require additional permits or licenses for your LLC. Most California business owners can apply online at the state's website.
The Secretary of State does not grant California licenses or permits. The best way to check the type of business licenses you need is to visit the CalGold website.
This online database links and contact information for government offices that issue licenses, permissions, and registration requirements at all governmental levels.
Check the U.S. Small Business Administration (SBA) guide for federal business licenses.
Other Essential Steps
Provided that you've completed the registration of your LLC, there are a few other things to keep in mind.
LLCs offer asset protection, but on one condition - you need to separate your personal assets from your business assets.
That means you'll likely have to open a separate bank account for your LLC and one for your personal use.
It's also advisable to lay the grounds for future challenges by getting business insurance for your LLC.
There are different types of insurance you want to have, including:
- Employee's compensation insurance: This covers you in case one of your employees gets injured. It also shields your business against lawsuits and claims by protecting the assets if a lawsuit is filed against the LLC.
- General liability insurance: Covers various damages that may happen to other people or their property while on company grounds or using company services.
- Professional liability insurance (optional): Professional LLCs may want to consider this type of insurance as it covers you from lawsuits filed against the LLC for professional negligence or malpractice.
- Property insurance: Covers damage to your property and equipment with high values in case of fire, theft, etc.
Related Articles:
Who Should Create a Limited Liability Company in California?
Anyone can create a limited liability company in California, but the decision depends on the taxpayer's tax situation and level of business activity. It applies even if you're a foreign LLC with an operating agreement.
Your legal advisor can assess your tax situation and guide various aspects, such as the operating agreement and other legal documents.
An LLC may be appropriate for you if you want liability protection, want to take advantage of pass-through taxation, or your business entity owns or rents real estate.
The Pros of Forming a California LLC
The primary benefit of an LLC in California is that its members have a mix of the protections offered by a corporation and those available in a partnership.
The same limited personal responsibility protection that shareholders of a company receive is provided to members of an LLC.
The member's personal assets are shielded from being taken for debt or other obligations in the case of any legal action.
Members of an LLC can choose to register the company as a multi-member partnership or as a sole proprietorship.
This allows income taxes to flow through the LLC and be collected by its members, which means it is not taxed. All these will be enumerated through the operating agreement.
The Cons of Forming a California LLC
California taxing authority imposes high taxes on LLCs. This is why LLC owners are required to pay annual Franchise tax in California, which significantly increases their expenses as business owners. The tax rate is even higher if you report income over $250,000.
Because of the many tax drawbacks that weigh on California LLCs, running a firm is difficult, even as a foreign LLC.
How Are California LLCs Taxed?
California LLCs are taxed as disregarded entities by default unless they file for S-Corp or C-Corp tax status.
There are several California state taxes you might have to register for.
Sales tax - sales tax is taxed on the total amount of sales made. The tax rate in California is 7.25%.
Annual franchise tax - The Franchise Tax Board requires that LLCs pay an $800 fee every year whether or not profits have been generated.
The only circumstances that qualify for an exemption from this requirement are if the LLC does not do any business in California during the tax year and its tax year is 15 days or fewer in length.
Employer tax - hiring employees within California requires LLCs to pay an employer tax, a percentage of wages paid. This rate varies depending on how many employees are being hired and what county they reside in. However, it does not exceed 100%.
Biennial Report - Every two years, every LLC must file a Statement of Information. Your first Statement of Information is due within 90 days of the Secretary of State's approval.
This is needed to keep your company valid with the California Secretary of State.
FAQs
Do You Have to Pay the $800 California LLC Fee the First Year?
You have to pay the $800 California fee in the first year of your operation. Although, the due date may vary depending on the formation date. The annual franchise tax due date is normally the 15th of the 4th month after forming the LLC.
What Happens if You Don’t Pay California Franchise Tax?
If you fail to pay the entire amount shown on your annual tax return by the original due date, you will be charged a penalty of 5% of the unpaid tax and an additional 0.5 percent for each month or part of the remaining unpaid.
Is the California Franchise Tax Board the Same as IRS?
The California Franchise Tax Board (FTB) is different from IRS. The FTB enforces state income tax rules, while the IRS governs federal income taxes. When a person fails to pay an outstanding tax amount due and owing, the FTB will take enforcement actions against them.
Who Can Open a Business Bank Account For an LLC?
Any authorized member or manager of an LLC can open a business bank account. If your LLC is a multi-member entity, you'll almost certainly be required to submit information for anybody with 25% or more ownership in the company to open an account.
How Long Does It Take To Get LLC Approved in California?
It will take up to 5 days maximum to get an LLC approved in California after submitting documents such as the operating agreement. If you register during the winter months, approval may take up to a week. Remember that you can create a Limited Liability Company online or by mail, which shortens the waiting process, especially if you opt for expedited processing.
What Is a California Agent for Service of Process?
A California agent for service of process is another term for the agent. It's a person or company appointed by a business entity to receive official legal papers and other official legal documents so that your LLC in California can remain in good standing with the state.
Is a Single-Member LLC a Disregarded Entity in California?
A single-member LLC is a disregarded entity in California for tax purposes. California law allows other pass-through entities to own your SMLLC as well. To form a single-member LLC in CA, you must file Form 568, even though you are a disregarded entity.
Is Starting an LLC in California a Difficult Process?
Starting an LLC in California might be a difficult process since it requires documents like the operating agreement. However, following the above steps doesn't have to be overwhelming, even as a foreign LLC.
While it may involve some paperwork and time, forming an LLC is achievable with proper assistance from a registered agent company.
The best way to ensure your company is set up correctly for success is by working with a professional LLC formation company, like ZenBusiness, with plenty of experience setting up Californian companies.
Our #1 Recommendation
ZenBusiness
References:
- https://oal.ca.gov/publications/ccr/
- https://www.irs.gov/businesses/small-businesses-self-employed/employer-id-numbers
